· The Chicago PMI was much weaker than expected, falling back below the 50-threshold to 49.3 in May from 50.4. The market consensus was for a modest rise to 50.5.

· The details of this report were quite weak, pointing to some downside risks to our below consensus forecast for the ISM manufacturing sector report tomorrow.

The Chicago PMI index drifted back into contractionary territory in May, falling to 49.3 from 50.4. The decline followed a similar weakening in the array of regional manufacturing sector indicators, with the Empire, Philly and Richmond Fed indices all in contractionary territory. The details of the report were equally disappointing, with all the forward looking indicators falling into contractionary territory. Beyond the sharp drop in new orders (down from 51.0 to 48.8) and production (down from 54.0 to 47.4), there were further contraction in employment (at 48.3), inventories (at 37.9) and order backlog (at 47.7). On an ISM-basis, the Chicago index dropped to 48.0 from 52.0. The prices paid sub-index held relatively steady at 56.5 (down marginally from 56.9).

The underlying tone of this report was very weak, and it mirrors the disappointing performance in other regional indicators such as the Philly, Empire and Richmond Fed PMI, suggesting that the US manufacturing sector recovery may be stumbling again. And while this report is generally quite volatile, the broad-based weakening across most components causes us to highlight the downside risks to our below consensus forecast for the ISM manufacturing sector report tomorrow, which we expect to drift down to 50.2 from 50.5.